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| IMCB.OB > SEC Filings for IMCB.OB > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Since opening in 1981, the Bank has continued to grow by opening additional
branch offices throughout Idaho. During 1999, the Bank opened its first branch
under the name of Intermountain Community Bank, a division of Panhandle State
Bank, in Payette, Idaho. Over the next several years, the Bank continued to open
branches under both the Intermountain Community Bank and Panhandle State Bank
names. In January 2003, the Bank acquired a branch office from Household Bank
F.S.B. located in Ontario, Oregon, which is now operating under the
Intermountain Community Bank name. In 2004, Intermountain acquired Snake River
Bancorp, Inc. ("Snake River") and its subsidiary bank, Magic Valley Bank, and
the Bank now operates three branches under the Magic Valley Bank name in south
central Idaho. In 2005 and 2006, the Company opened branches in Spokane Valley
and downtown Spokane, Washington, respectively, and operates these branches
under the name of Intermountain Community Bank of Washington. It also opened
branches in Kellogg, which operates under the name of Panhandle State Bank and
Fruitland, Idaho, which operates under the name of Intermountain Community Bank.
In 2006, Intermountain opened a Trust & Wealth division, and purchased a
small investment company, Premier Alliance, which now operates as Intermountain
Community Investment Services (ICI). The acquisition and development of these
services improves the Company's ability to provide a full-range of financial
services to its targeted customers. In 2007, the Company relocated its Spokane
Valley office to a larger facility housing retail, commercial, and mortgage
banking functions and administrative staff. In the second quarter of 2008, the
Bank completed the Sandpoint Center, its new corporate headquarters, and
relocated the Sandpoint branch and administrative staff into the building.
Intermountain offers banking and financial services that fit the needs of the
communities it serves. Lending activities include consumer, commercial,
commercial real estate, commercial and residential construction, mortgage and
agricultural loans. A full range of deposit services are available including
checking, savings and money market accounts as well as various types of
certificates of deposit. Trust and wealth management services, investment and
insurance services, and business cash management solutions round out the
Company's financial offerings.
Intermountain seeks to differentiate itself by attracting, retaining and
motivating highly experienced employees who are local market leaders, and
supporting them with advanced technology, training and compensation systems.
This approach allows the Bank to provide local marketing and decision-making to
respond quickly to customer opportunities and build leadership in its
communities. Simultaneously, the Bank has more recently focused on standardizing
and centralizing administrative and operational functions to improve efficiency
and the ability of the branches to serve customers effectively.
Current Economic Challenges and Future Outlook
The deep economic downturn continued to present significant challenges for
community and regional banks during the second quarter. Generally, unemployment
rates increased rapidly, real estate valuations fell, and borrower defaults and
foreclosures grew steadily higher. These conditions had a particularly harsh
impact on community banks like ours that rely on lending to local businesses and
consumers for the majority of revenue and profit. That said, there were some
signs that the economy may be close to or has already begun improving. Second
quarter results showed stabilization in many areas and even some improvement in
a few key indicators, including stock prices, home sales, leading economic
indicators, manufacturing surveys and consumer confidence surveys. These
indicators present a glimmer of hope, but should not distract from the
challenges still facing our industry. Projected continued increases in
unemployment and softer business and commercial real estate markets will
challenge financial institutions for the next several quarters. In this
environment, balance sheet management, and in particular, strong capital and
liquidity management, are critical.
With the exception of the Boise-Nampa-Caldwell MSA, the Idaho, eastern
Washington and eastern Oregon economies continue to weather the current storm
better than many other parts of the country. These markets have experienced
increases in unemployment rates and lower real estate valuations, but the
impacts have been relatively muted in comparison to other areas. In contrast,
the Boise area has been hit hard by a combination of rapidly increasing
unemployment and excessive commercial and residential real estate inventory. As
a result, many institutions operating in this market have recognized substantial
losses.
Over the longer-term, we continue to have a positive outlook about the
region's economic future, including the Boise area's. The region's relative
economic diversity, low cost of living, attractive, low-cost business climate,
and desirable quality of life should soften the worst impacts of the ongoing
recession and lead to a faster, stronger recovery than in many other areas.
Company performance during the second quarter reflected the challenges facing
the economy and financial industry. In particular, the Company experienced the
following:
• Substantially higher credit losses and provisions for loan losses, to
reflect higher default rates, declining collateral valuations, and
aggressive problem loan identification, workout and liquidation efforts
• Slowing loan demand, particularly from higher quality borrowers, as businesses and consumers continued to retrench
• Continuing pressure on fee income, as weaker economic activity depressed revenues from a broad range of fee categories, including trust and investment services and credit card related fees
Company management continues to respond to the market conditions by reducing
balance sheet risk, improving control over controllable expenses and engaging in
extensive customer communication, marketing and education efforts. The Company
has been particularly successful in garnering deposit growth while
simultaneously reducing funding costs in a highly competitive deposit
environment.
We anticipate that both the national and regional economy will continue to be
challenging in the near future. As such, we do not anticipate a rapid return to
high levels of industry or Company profitability for the next few quarters. We
continue to believe, however, that long-term opportunities will arise for
institutions that position themselves to capitalize on them, and we are taking
such steps. In particular, we continue to hold strong regulatory capital,
liquidity and loss reserve levels, we're stepping up our deposit-gathering
efforts, and we're increasing our already strong leadership positions in the
communities we serve. Through our corporate-wide initiative, Powered by
Community, we are engaging in extensive leadership, community development and
educational efforts designed to foster economic growth in our communities and
create business development opportunities for the Bank. We also continue to
focus on improving our internal business processes, with the joint goal of
enhancing our customers' experience and reducing costs. Initiatives already
implemented have improved our deposit volumes and customer experience metrics
while simultaneously resulting in decreased compensation costs. A number of
additional initiatives are scheduled for implementation through the balance of
this year.
In this environment, the most significant perceived risks to the Company are
additional credit portfolio deterioration, potential liquidity pressures and
human resources risk. The ongoing recession and increasing unemployment rates
will undoubtedly continue to have a negative impact on the credit portfolio
during the coming year, leading to elevated customer default levels. Relative
loss levels will also be high, as collateral values remain pressured. Management
has responded to the credit pressures by adding to the Company's loan loss
reserve, maintaining strong capital levels, tightening underwriting and loan
pricing standards, and shifting additional resources to assist in this area. The
Company's best talent is focused on managing our credit portfolio through this
very challenging period.
Liquidity risk for the Company could arise from the inability of the Bank to
meet its short-term obligations, particularly deposit withdrawals by customers,
reductions in repurchase agreement balances by municipal customers, and
restrictions on brokered certificates of deposit or other borrowing facilities.
Company management has implemented a number of actions to reduce liquidity
exposure, including: (1) enhancing its liquidity monitoring system;
(2) maintaining a high level of liquid cash instruments and marketable or
pledgeable securities on its balance sheet; (3) enhancing its deposit-gathering
efforts; (4) communicating frequently and openly with both internal staff and
external customers about the financial position, management strategy and future
outlook for the Bank; (5) participating in the U.S. Treasury's Capital Purchase
Program; and (6) expanding its access to other liquidity sources, including the
Federal Home Loan Bank, the Federal Reserve, and additional CD brokers. These
actions have strengthened the Company's current on- and off-balance sheet
liquidity considerably and positioned it well to face the ongoing economic
challenges.
Given the Company's internal moves to reduce staffing levels and compensation
expense, the risk of losing critical human resources may be higher now, although
the overall job market is less competitive. In addressing this risk, management
focuses on developing a culture that promotes, retains and attracts high quality
individuals. While muted in the short-term, our compensation and reward systems
also contribute directly to maintaining and enhancing this culture, and we
encourage strong participation among all employees in establishing and
implementing the Bank's business plans.
Critical Accounting Policies
The accounting and reporting policies of Intermountain conform to Generally
Accepted Accounting Principles ("GAAP") and to general practices within the
banking industry. The preparation of the financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. Intermountain's management has
identified the accounting policies described below as those that, due to the
judgments, estimates and assumptions inherent in those policies, are critical to
an understanding of Intermountain's Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Income Recognition. Intermountain recognizes interest income by methods that
conform to general accounting practices within the banking industry. In the
event management believes collection of all or a portion of contractual interest
on a loan has become doubtful, which generally occurs after the loan is 90 days
past due, Intermountain discontinues the accrual of interest and reverses any
previously accrued interest recognized in income deemed uncollectible. Interest
received on nonperforming loans is included in income only if recovery of the
principal is reasonably assured. A nonperforming loan is restored to accrual
status when it is brought current or when brought to 90 days or less delinquent,
has performed in accordance with contractual terms for a reasonable period of
time, and the collectability of the total contractual principal and interest is
no longer in doubt.
Allowance For Loan Losses. In general, determining the amount of the
allowance for loan losses requires significant judgment and the use of estimates
by management. This analysis is designed to determine an appropriate level and
allocation of the allowance for losses among loan types and loan classifications
by considering factors affecting loan losses, including: specific losses; levels
and trends in impaired and nonperforming loans; historical bank and industry
loan loss experience; current national and local economic conditions;
volume, growth and composition of the portfolio; regulatory guidance; and other
relevant factors. Management monitors the loan portfolio to evaluate the
adequacy of the allowance. The allowance can increase or decrease based upon the
results of management's analysis.
The amount of the allowance for the various loan types represents
management's estimate of probable incurred losses inherent in the existing loan
portfolio based upon historical bank and industry loan loss experience for each
loan type. The allowance for loan losses related to impaired loans is based on
the fair value of the collateral for collateral dependent loans, and on the
present value of expected cash flows for non-collateral dependent loans. For
collateral dependent loans, this evaluation requires management to make
estimates of the value of the collateral and any associated holding and selling
costs, and for non-collateral dependent loans, estimates on the timing and risk
associated with the receipt of contractual cash flows.
Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, loan quality classifications, value of
collateral, repayment ability of borrowers, and historical experience factors.
The historical experience factors utilized are based upon past loss experience,
trends in losses and delinquencies, the growth of loans in particular markets
and industries, and known changes in economic conditions in the particular
lending markets. Allowances for homogeneous loans (such as residential mortgage
loans, personal loans, etc.) are collectively evaluated based upon historical
bank and industry loan loss experience, trends in losses and delinquencies,
growth of loans in particular markets, and known changes in economic conditions
in each particular lending market.
Management believes the allowance for loan losses was adequate at June 30,
2009. While management uses available information to provide for loan losses,
the ultimate collectability of a substantial portion of the loan portfolio and
the need for future additions to the allowance will be based on changes in
economic conditions and other relevant factors. A further slowdown in economic
activity could adversely affect cash flows for both commercial and individual
borrowers, as a result of which the Company could experience increases in
nonperforming assets, delinquencies and losses on loans.
A reserve for unfunded commitments is maintained at a level that, in the
opinion of management, is adequate to absorb probable losses associated with the
Bank's commitment to lend funds under existing agreements such as letters or
lines of credit. Management determines the adequacy of the reserve for unfunded
commitments based upon reviews of individual credit facilities, current economic
conditions, the risk characteristics of the various categories of commitments
and other relevant factors. The reserve is based on estimates, and ultimate
losses may vary from the current estimates. These estimates are evaluated on a
regular basis and, as adjustments become necessary, they are recognized in
earnings in the periods in which they become known through charges to other
non-interest expense. Draws on unfunded commitments that are considered
uncollectible at the time funds are advanced are charged to the reserve for
unfunded commitments. Provisions for unfunded commitment losses, and recoveries
on commitment advances previously charged-off, are added to the reserve for
unfunded commitments, which is included in the accrued expenses and other
liabilities section of the Consolidated Statements of Financial Condition.
Investments. Assets in the investment portfolio are initially recorded at
cost, which includes any premiums and discounts. Intermountain amortizes
premiums and discounts as an adjustment to interest income using the interest
yield method over the life of the security. The cost of investment securities
sold, and any resulting gain or loss, is based on the specific identification
method.
Management determines the appropriate classification of investment securities
at the time of purchase. Held-to-maturity securities are those securities that
Intermountain has the intent and ability to hold to maturity, and are recorded
at amortized cost. Available-for-sale securities are those securities that would
be available to be sold in the future in response to liquidity needs, changes in
market interest rates, and asset-liability management strategies, among others.
Available-for-sale securities are reported at fair value, with unrealized
holding gains and losses reported in stockholders' equity as a separate
component of other comprehensive income, net of applicable deferred income
taxes.
Management evaluates investment securities for other-than-temporary declines
in fair value on a periodic basis. If the fair value of investment securities
falls below their amortized cost and the decline is deemed to be
other-than-temporary, the securities will be written down to current market
value and the write down will be deducted from earnings. At March 31,2009,
residential mortgage-backed securities included a security comprised of a pool
of mortgages with a remaining unpaid balance of $4.2 million. Due to the lack of
an orderly market for the security, its fair value was determined to be
$2.5 million at March 31, 2009 based on analytical modeling taking into
consideration a range of factors normally found in an orderly market. Of the
$1.7 million unrealized loss on the security, based on an analysis of projected
cash flows, $244,000 was charged to earnings as a credit loss and $1.5 million
was recognized in other comprehensive income. Impairment losses on securities
charged to earnings in the three months ended June 30, 2009 and 2008 were $0 and
$0, respectively. See Notes to Consolidated Financial Statements, notes 2 and 9
for more information on the other-than-temporary impairment and the calculation
of fair or carrying value for the investment securities. Charges to income could
occur in future periods due to a change in management's intent to hold the
investments to maturity, a change in management's assessment of credit risk, or
a change in regulatory or accounting requirements.
Goodwill and Other Intangible Assets. Goodwill arising from business
combinations represents the value attributable to unidentifiable intangible
elements in the business acquired. Intermountain's goodwill relates to value
inherent in the banking business and the value is
dependent upon Intermountain's ability to provide quality, cost-effective
services in a competitive market place. As such, goodwill value is supported
ultimately by revenue that is driven by the volume of business transacted. A
decline in earnings as a result of a lack of growth or the inability to deliver
cost-effective services over sustained periods can lead to impairment of
goodwill that could adversely impact earnings in future periods. Goodwill is not
amortized, but is subjected to impairment analysis each December. In addition,
generally accepted accounting principles require an impairment analysis to be
conducted any time a "triggering event" occurs in relation to goodwill.
Management believes that the significant market disruption in the financial
sector and the declining market valuations experienced over the past year
created a "triggering event." As such, management conducted an interim
evaluation of the carrying value of goodwill in June 2009. As a result of this
analysis, no impairment was considered necessary as of June 30, 2009. Major
assumptions used in determining impairment were increases in future income,
sales multiples in determining terminal value and the discount rate applied to
future cash flows. However, future events could cause management to conclude
that Intermountain's goodwill is impaired, which would result in the recording
of an impairment loss. Any resulting impairment loss could have a material
adverse impact on Intermountain's financial condition and results of operations.
Other intangible assets consisting of core-deposit intangibles with definite
lives are amortized over the estimated life of the acquired depositor
relationships. At June 30, 2009, the carrying value of the Company's goodwill
and core deposit intangible was $11.7 million and $507,000, respectively.
Real Estate Owned. Property acquired through foreclosure of defaulted
mortgage loans is carried at the lower of cost or fair value less estimated
costs to sell. At the applicable foreclosure date, other real estate owned is
recorded at fair value of the real estate, less the costs to sell the real
estate. Subsequently, other real estate owned, is carried at the lower of cost
or fair value, is periodically assessed for impairment based on fair value at
the reporting date. Development and improvement costs relating to the property
are capitalized to the extent they are deemed to be recoverable.
Intermountain reviews its real estate owned for impairment in value whenever
events or circumstances indicate that the carrying value of the property may not
be recoverable. In performing the review, if expected future undiscounted cash
flow from the use of the property or the fair value, less selling costs, from
the disposition of the property is less than its carrying value, a loss is
recognized. Because of rapid declines in real estate values in the current
distressed environment, management has increased the frequency and intensity of
its valuation analysis on its OREO properties. As a result of this analysis,
carrying values on some of these properties have been reduced, and it is
reasonably possible that the carrying values could be reduced again in the near
term.
Fair Value Measurements. Effective January 1, 2008, Intermountain adopted
SFAS 157, "Fair Value Measurements". SFAS 157 establishes a standard framework
for measuring fair value in GAAP, clarifies the definition of "fair value"
within that framework, and expands disclosures about the use of fair value
measurements. A number of valuation techniques are used to determine the fair
value of assets and liabilities in Intermountain's financial statements. These
include quoted market prices for securities, interest rate swap valuations based
upon the modeling of termination values adjusted for credit spreads with
counterparties and appraisals of real estate from independent licensed
appraisers, among other valuation techniques. Fair value measurements for assets
and liabilities where there exists limited or no observable market data are
based primarily upon estimates, and are often calculated based on the economic
and competitive environment, the characteristics of the asset or liability and
other factors. Therefore, the results cannot be determined with precision and
may not be realized in an actual sale or immediate settlement of the asset or
liability. Additionally, there are inherent weaknesses in any calculation
technique, and changes in the underlying assumptions used, including discount
rates and estimates of future cash flows, could significantly affect the results
of current or future values. Significant changes in the aggregate fair value of
assets and liabilities required to be measured at fair value or for impairment
will be recognized in the income statement under the framework established by
GAAP. If impairment is determined, it could limit the ability of Intermountain's
banking subsidiaries to pay dividends or make other payments to the Holding
Company. See Note 9 to the Consolidated Financial Statements for more
information on fair value measurements.
Derivative Financial Instruments and Hedging Activities. In various aspects
of its business, the Company uses derivative financial instruments to modify its
exposure to changes in interest rates and market prices for other financial
instruments. Many of these derivative financial instruments are designated as
hedges for financial accounting purposes. Intermountain's hedge accounting
policy requires the assessment of hedge effectiveness, identification of similar
hedged item groupings, and measurement of changes in the fair value of hedged
items. If, in the future, the derivative financial instruments identified as
hedges no longer qualify for hedge accounting treatment, changes in the fair
value of these hedged items would be recognized in current period earnings, and
the impact on the consolidated results of operations and reported earnings could
be significant.
For more information on derivative financial instruments and hedge
accounting, see Note 8 to the Consolidated Financial Statements.
Results of Operations
Overview. Intermountain recorded a net loss to common shareholders of
$11.4 million, or $1.37 per diluted share for the three months ended June 30,
2009, compared with a net loss of $532,000 or $0.06 per diluted share for the
first quarter of 2009 and net income of $2.3 million or $0.27 per diluted share,
for the three months ended June 30, 2008. Intermountain recorded a net loss to
common shareholders of $11.9 million, or $1.43 per diluted share, for the six
months ended June 30, 2009, compared with net income of $3.9 million, or $0.46
per diluted share, for the six months ended June 30, 2008. The decline in
earnings over both the three months and six months ended June 30, 2008 primarily
reflected increased provisions for loan losses. The provision totaled $18.7
million compared to $2.1 million for the
comparative three month periods and $21.5 million and $2.4 million for the
comparative six month periods, as the Company added to its reserve for loan
losses and adjusted real estate loan and property valuations down to reflect
continuing declines in its local markets.
The annualized return on average assets ("ROA") was -4.02 %, -0.04% and 0.88%
for the three months ended June 30, 2009, March 31, 2009 and June 30, 2008,
respectively, and -2.04% and 0.76% for the six months ended June 30, 2009 and
2008, respectively. The annualized return on average equity ("ROE") was -58.2%,
-2.5% and 10.0% for the three months ended June 30, 2009, March 31, 2009 and
. . .
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